4 Reasons to Pay With Cash Over Credit

While maintaining a line of credit is important for your credit score, there's always a time and place for cash.

BOSTON ( TheStreet) -- A woman in California named Diane Campbell made headlines when she tried to buy an Apple ( AAPL) iPad with a wad of saved-up cash, only to be told by an Apple store employee that the company didn't accept cash for iPad purchases.

Apple eventually reversed its credit-only policy, but the story was a reminder that there are still people out there who prefer to dole out Benjamins over plastic. While maintaining a line of credit is important for keeping a high credit score, there are plenty of reasons to choose cash over credit.

1. Your credit card transactions are punishing the retailer: Most consumers realize that retailers pay credit card processing fees, but many don't realize the extent of these fees. Overall "swipe" fees charged to retailers and other business by Visa ( V) and MasterCard banks totaled $48 billion in 2008, up from 16.6 billion in 2001, according to the National Retail Federation, with debit swipe fees accounting for $20 billion of the total.

Generally, this interchage fee is about 2% the value of each transaction, but retailers take a bigger hit when consumers use cards to buy a single little item - a cheap pack of gum, for instance - to the point that the fees can exceed the profit margins. "A retailer can literally lose money when a consumer uses a credit card for small items," says Craig Shearman, a spokesman for the foundation.

2. Your credit card transactions are punishing the poor: One of the most obvious reasons to pay with a credit card instead of cash is the rewards program - in which the credit card company offers airline miles, points toward merchandise, or even cash back for paying with credit. The problem with that system is that it punishes those who can't afford or qualify for credit cards. Again, most merchants must jack up merchandise prices across the board in order to keep up with credit card swipe fees.

"What most consumers do not know is that their decision to pay by credit card involves merchant fees, retail price increases, a nontrivial transfer of income from cash to card payers, and consequently a transfer from low-income to high-income consumers," reads a recent study by the Federal Reserve Bank of Boston. On average, each cash-using household effectively pays $151 to card-using households, and each card-using household receives $1,482 from cash users, every year, according to the study.